205. Benefits To Importer

It has been worth while to set down the whole practical course of one of these typical commercial credit operations in order that there may be no confusion in dealing with the theoretical side - the reason why the various parties go into such transactions and the benefits each gets out of it. Take first the importer. It is all a matter of credit with him; if he can get a banker to give him a commercial letter of credit, he can bring in any quantity of merchandise, have anywhere up to four months to sell it in, and never have to put up a dollar of his own money. All it costs him is a commission on the amount of the drafts drawn.

The regular commission is one-quarter per cent for each thirty days of the life of the draft drawn. Thus, if the drafts are drawn at sixty days' sight, the merchant pays a commission of two times one-quarter per cent, which equals one-half per cent. If the draft runs four months, or 120 days, the commission would be four times one-quarter per cent, which equals one per cent. This is the regular commission. As may be imagined, it is changed in all sorts of ways as a matter of individual negotiation. On coffee credits there are several. banks in New York now doing the business at three-eighths per cent for ninety days' sight drafts - which is exactly one-half the regular commission. So keen is the competition that there is one large bank which is doing six months' business at only one-half per cent. Such business is ruinous, a commission of that kind being no fair compensation for the risk taken.

206. Benefits To Exporter

So much for what the importer gets out of the transaction. How about the exporter in China? As has been shown, he has been able to make a sale on a four months' credit, and to get his money without a day's delay and put himself in shape for the next transaction. Of course, when he took his four months' sight sterling draft to his banker to sell he did not get as high a rate of exchange as if he had had a sight draft to sell, the difference representing the discount. But that was allowed for in the price he originally quoted for the goods. What counts with him is that he has made the sale, has received his money, and is ready for the next transaction.

207. Banker's Commission

As for the two bankers, one in New York and one in London, their part in the transaction has been influenced simply by the desire to make a commission. Both of them took a certain risk, to be sure, but credits of this kind are never issued except to entirely trustworthy parties. And as a matter of fact neither banker has had to put up any real money. The one in New York has had to stand responsible for the importer to whom he issued the credit, and the one in London has had to obligate himself by "accepting" the drafts - putting his name on commercial paper - but no one has had to advance any actual money. The real money that the shipper in China received was based entirely on the credit of the banks concerned in the operation.

For which reason it appears that as long as a bank here can get a bank in London to "accept" drafts drawn under the American bank's letters of credit, there is almost no limit to the volume of business it can do. And even a small rate of commission will return big profits. There are a number of banks and bankers doing business in New York for whom their foreign correspondents regularly keep running acceptances amounting to $5,000,000. A fair average net profit to the bank issuing the credit would be called 1/4 per cent, turned over four times a year, so that a bank with $5,000,000 of acceptances constantly running abroad would stand to make, say, $50,000 a year in commissions without having put up a dollar of capital.

A book might be written on the various forms of commercial credit business being transacted but it would

Bailee Receipt

Received from the Guarantee Trust Company Of New York and................................................................hereby undertake to sell the property therein specified, for account of the said Company, and collect the proceeds of the sale or sales thereof, and deposit the same immediately on receipt thereof in the said Company, at

....................................................................................................to the credit of............................................................................................

hereby acknowledging............................................to be Bailee..................................................................................................................

of the said property for the said Company.

If the above are not sold and the proceeds so deposited within ten days from this date,..................undertake to return all documents at once on demand, or to pay the value of the goods, at the Company's option

Dated at.............................. ................ ...................................... the.................................. .............................. ..................................*.*

......................................*......................................................................

The said goods while in my our hands shall be fully insured against loss by fire,

Bailee Receipt

Received from the Guaranty Trust Company of New York, solely for the purpose of selling same for account of said Company: marked and numbered..........................................................................................................................................................................

and....................................................................hereby undertake to sell the property herein specified, for account of the said

Company, and collect the proceeds of the sale or sales thereof, and deliver the same immediately on receipt thereof to the said

Company, to be applied to the credit of............................................................................................................................................

hereby acknowledging............................................................to be Bailee of the said property for the said Company, and................

................................................................do hereby assign and transfer to the said Company the accounts of the purchaser or purchasers of said property to the extent of the purchase price thereof, of which fact notice shall be given at the time of delivery of the said property by................to such purchaser or purchasers and all invoices therefor shall have imprinted, written or stamped thereon by................the following:

"Transferred and payable to

Guaranty Trust Company Of New York,

Nassau and Cedar Streets, New York."

// the said property is not sold and the proceeds so deposited within ten days from this date,................undertake to return all documents at once on demand, or to pay the value of the goods, at the Company's option.

Dated at........................................................................................................the........................................................................191

The terms of this receipt and agreement shall continue and apply to the merchandise above referred to whether or not control of the same, or any part thereof, be at any time restored to the Guaranty Trust Company of New York, and subsequently delivered to us.

bands shall be fully insured against loss by fire.

my our

The said goods while in be only a more detailed description of operations whose theory is the same as the one I have attempted to outline. Whether the merchandise in question is bristles and comes from China, or whether it is coffee and comes from Brazil, makes little difference so far as the banking end of the transaction is concerned. Nor does it make any difference if the article happens to be silk or dry goods imported from France, or if the credit directs that the drafts shall be drawn in francs on some bank in Paris instead of pounds on some bank in London. All these are ramifications of the same thing. They all come back to the one central idea that the banker turns over not his money but his credit to the importer, enabling the importer to do safely a very much larger amount of business than he would do on his own limited capital.